This post provides ATM’s Sub-Sahara trends and outlook for 2016. In the coming posts we will further explore some of the key drivers, risks and opportunities.

Africa Trends – Sub-Sahara

Mega-trends – uncertain times, end of easy growth:

Continued, but slowing short term growth. Growth will continue based on IT/technology and pay-off from earlier reforms. Medium term less certain and depending on renewed reform drive.

The DNA is not changing. African states and institutions are overall not getting stronger. Politics is driven by neo-patrimonialism. A few places see incremental improvements, but similarly, a number of places are stagnating or drifting back in terms of political and economic space. Limited capacity to handle crisis.

End of commodities boom, cheap money and China driver. Growth drivers slowing, no fiscal space for cushioning. Political complacency now beginning to backfire.

Issue

Parameters

Status, July 2014

Why

To watch

Present situation

Social development

Growth and macro-economy

Governance and security

Global drivers

Second best

Trend: ↘

Growth continues, but risks increasing. Medium term

Macro-economic stability continues ↘

Market size ↗

Democracy →

Corruption ↘

Security concerns →

Inequality ↘

Increasing interventionism

Key infrastructure (power, harbours)

Popular dissatisfaction

Root causes and needed reforms progress

Major security incidents

China slowdown impact

Business implications:

Market size and strength: Growing. Still substantial gaps with opportunities for good returns. Consumer markets in booming Lagos, Nairobi and other urban areas of particular interest. Kenya and to some extent Nigeria will continue with continue as growth engines, while Ghana, Zambia and to a lesser extent Tanzania, Uganda and Mozambique will face serious slow-down. South Africa continues on a slow-growth long-term decline trend due to political uncertainty, dependence on China and lack of reform.

Ebola; the main risks appear to be over. Possibilities for investors with expertise and willingness to take high risk in countries emerging from Ebola.

Noteworthy development in ATM’s focus countries:

In the 8 countries closely followed by ATM three points are worth following:

Zambia: Rapidly facing crisis territory. Growing fiscal deficits, power crisis and a high degree of political complacency combined with elections next year is a lethal cocktail for a country that depends on copper for 80% of exports.

Ghana remains in trouble despite an IMF programme notionally being on track. Continued corruption – most recently exposed across the judiciary – lack of reform and an upcoming election (Dec. 2016) are all major risk points. Angola, Tanzania, Uganda and Mozambique are all facing similar challenges although for now the challenges are slightly less serious.

Nigeria is facing continued security challenges, a fiscal crunch and exchange rate pressure, but President Buhari continues to manoeuvre well. His political capital and support may be enough to drive non-oil growth and thereby unleash some of Nigeria enormous untapped potential.

China slowdown is the main cause of the slowdown, both through less demand for extractives (oil, copper) and slowing investment. ATM’s view on the China slowdown is that the while growth rates may remain high (around 6%), China’s growth will change towards domestic consumption. In other words, the slowdown is real and African countries need to adjust to that reality.

We are closely watching if and how governments are acknowledging and reacting to the slowdown. Some of the initial political/official reactions have been disappointing; largely expressing denial and continued complacency. Risks, especially around elections for inward-looking, populist interventions are therefore increasing. At the same time the new urban middle-class, strongly facilitated by increased transparency and easy access to information may counterbalance some of these negative trends.

El Nino: ATM are not experts on El Nino, but we acknowledge the risk to harvests, power generation, destruction of infrastructure and humanitarian disasters.

Scenario status:

ATM operates 4 core scenarios. Overall, there are most features from the 2nd best scenario and an increasing number of features from the 3rd scenario (credit, institutional reform speed, fiscal space and China slowdown). We are also closely following key political events – notably the Tanzania, Zambia, Ghana and Uganda elections and the probability and impact of uncertainly or (less likely) serious unrest.

We continue to analyse and follow the Nigeria election preparations closely. At the same time clients are particularly interested in scenarios for post-election issues and results.

This update looks at two issues. First we offer further reflections on the postponement of the elections. Second, we outline our summary scenarios based on the two most likely election results.

Postponement: Most observers indicate that Jonathan and PDP are now less likely to win the elections. Further detail on the background for events and process behind the election postponement indeed indicate that Jonathan continues to loose control. The justification by security heads was never credible in the first place and with Jonathan later stating that he had nothing to do with it points to a very weak commander-in-chief.

The key question now seem to be who is behind Jonathan, what are their interests and levels of loyalty. The answers are not clear. The old godfathers appear to have abandoned him. A few delta big men are the most vocal (Tompolo, Boyloaf) supporters, but their loyalty may be limited; if their objective is further pay-off, they may be willing to go far to ensure a Jonathan win, but equally if he losses they will quickly form new alliances.

Could there be a further conspiracy around a rigged Jonathan win, leading to a “compromise” candidate being put in place? Certainly this would suit large parts of the PDP elite and depending on the candidate, may also be good enough for the South West, including Lagos’ crucial middle class.

Assessment: we continue to warn against underestimating Jonathan and incumbency, but recent events have further increased momentum for the APC camp. Expect increased use of violence; both in the north and in the delta. Election related violence – beyond very localised violence – in the SW, Abuja or other major cities would be indications of a further step-change in willingness to use excessive means to win.

Post-election scenarios: We are further refining our main scenarios for immediate post-elections (mainly on violence) and beyond (business environment, stability). Headlines:

A Jonathan win will almost inevitably lead to violence. The more use of pre-election violence and signs of election day malpractice, the worse it would be. The game-changer is Lagos and the SW. Should the SW destabilise or experience prolonged violence, risks of wider state-failure are significant.

A Buhari win will likely be cleaner and more widely accepted. The primary question is whether – or to what extent – Jonathan’s hard-line supporters in the delta and elsewhere will stay loyal.

A “messy” result. Possibly the worst result and most likely a variation of a Jonathan rigged win. Key questions are how far would it go; how is the elite preparing for it and are the elite interests sufficiently aligned to come together and deal effectively with such a situation.

Our headline assessment beyond elections for the business environment is that it may take longer than usual to return to normal – and that the risks that “normal” will not return are not-neglectable. Time for caution.

This year we have been busy analysing a range of issues and their implications for African trends. Clients have been particularly interested in oil prices, gas, drivers and robustness of growth, China slowdown implications for Africa, Boko Haram, fiscal space, Zambian and Nigerian elections. We have produced analysis and “deep dives” into all of the above issues and more and will continue to do so.

Many blog followers have asked for our views on the Nigerian elections. Below our headlines and summary ideas. As always, comments, suggestions and views are most welcome.

Headlines:

We think PDP and Jonathan will win, but quite likely through a less than credible process. A run-off is also possible – this would increase the likelihood of a Buhari victory.

Tension is rising with the announced postponement and increases the risk of post-election violence.

Growth prospects for 2015 should be adjusted downwards, initially due to 6 weeks of additional (costly!) electioneering and uncertainty, but above all due to the risk of post-election violence or tension – this time round potentially involving the Lagos growth-engine. The risk of “tectonic shifts” – Nigeria dancing on the brink or breaking up is on the rise.

Analysis:

The 2015 presidential elections seem to become the closest fought since return to democracy. Despite the coming together of the formidable PDP election machine during the last 6 months, it’s clear that Buhari and the APC are very strong. The main difference compared to 2011 is the fact that Lagos and the South West have a stake in the elections this time round.

PDP and Jonathan have the advantage of incumbency. With Jonathan’s credibility at a minimum he has gone to extremes, even by Nigeria standards. The postponement this weekend may just be a first step. If pre-election indications or initial election results indicate a loss, expect anything – there is too much at stake. State of emergency, instigated violence in the North or other opposition areas and exceptional voter turnout in pro-PDP areas may be part of the tools.

We agree with the view of many observers that the reasons from security heads are broadly speaking not credible. First, it’s surprising that an offensive against Boko Haram has to start on the 14th February. Second, cynically speaking, it’s arguably in Jonathan’s interest to have Boko Haram more active (more insecurity equals less voter turnout in his main opposition areas). That’s aside the ATM analysis that Boko Haram is more about social solutions supported by military interventions rather than military solutions only.

The election commission, INEC and the chairperson Prof. Jega accepted the advice. We think that was partly out of no-choice and partly helpful. We understand that almost 30 million voter cards are still to be distributed, reportedly mainly in Lagos and the north. If not handled well, this would have led to major challenges for the elections. On balance however, the postponement leaves INEC weaker.

We are working on a number of scenarios for growth. Short-term growth is affected. Ideology between the parties does not matter much, but obviously a new president would have implications for certain contracts and issues. It would take significant and persistent violence to fundamentally slow the Lagos growth engine, but the risks are increasing. We are presently not attaching disproportionate weight to delta militants’ threats of violence if Jonathan does not win, but this obviously has to be monitored.

Methodology:

We are working with a wide range of partners and stakeholders. On top of that, we have in-house analysis of key faultlines and demographics as well as detailed analysis from the 2007 and 2011 elections, all at state- and geopolitical zone levels. We combine that with key lessons and differences to the 2011 elections (e.g. stronger APC unity, Lagos stake in elections).

This post provides an update to the July Sub-Sahara trends. The fundamental status is unchanged, but there are obviously important country-specific changes and updates, incl. on Ebola and fiscal crisis in Ghana and Zambia.

Mega-trends – unchanged since last update in July 2014:

Continued growth for the short- and medium term. Growth will continue based on natural resources, IT/technology and pay-off from earlier reforms.

The DNA is not changing. African states and institutions are overall not getting stronger. Politics is driven by neo-patrimonialism. A few places see incremental improvements, but similarly, a number of places are stagnating or drifting back in terms of political and economic space. Limited capacity to handle crisis.

Inequality is an increasing risk. Perceived and real gaps are becoming more visible gaps. Growth is largely jobless in many places.

Issue

Parameters

Status, July 2014

Why

To watch

Present situation

Social development

Growth and macro-economy

Governance and security

Global drivers

Second best

Trend: ↘

Growth momentum continues, but risks increasing

Macro-economic stability continues →

Market size ↗

Democracy ↗

Corruption ↘

Security concerns ↘

Inequality ↘

Increasing interventionism

Key infrastructure (power, harbours)

Popular dissatisfaction

Root causes and needed reforms progress

Major security incidents

Ebola

China slowdown

Business implications:

Market size and strength: Growing. Still substantial gaps with opportunities for good returns. Consumer markets in booming Lagos, Nairobi and other urban areas of particular interest.

Ebola; at this stage, our analysis indicate that implications outside the 3 main affected countries are minimal. A spread beyond individual cases to Ivory Coast and Ghana would be more serious and substantially affect cocoa prices and re-emergence in Nigeria could affect overall growth rates.

Noteworthy development in ATM’s focus countries:

In the 8 countries closely followed by ATM three points are worth following:

Zambia: despite a tricky political situation, Zambia is continuing progress toward reducing their fiscal deficit, latest by maintaining a public wagebill freeze.

Ghana has approached the IMF and are working to agree a programme. Initial indications are worrying – messages are contradictory, the public seem increasingly worried and it’s not clear government will be able to agree or implement a programme.

Growth in mega-cities continue to impress. Lagos is the frontrunner in this regard, but Nairobi is impressive too. In the short run, a key test for Lagos and Nigeria is the implications of a likely messy and violent election in February 2015.

Scenario status:

ATM operates 4 core scenarios. Overall, there are most features from the 2nd best scenario with a few features from the top scenario (continued natural resource finds, G7 growth) and a few from the 3rd scenario (security, institutional reform speed, fiscal space and China slowdown). We are also closely following key political events – notably the Nigerian elections and the probability and impact of major security incidences. Core to moving to a better scenario would be about better use of natural resources and better fiscal management and public sector spending, probably pushed by a more engaged middle class.

Reforms and addressing root courses (unchanged): Most countries and governments are aware of key root causes and have various degrees of credible plans to address them. Urban middle classes increasingly demand action. Yet most leaders are struggling to find space between vested interests, short-term political pressures and popular demands. The result tends to be very limited progress in terms of systemic reform. A range of technical reforms – incl. business environment reforms are still making progress, even if the overall trend tend to be towards more interventionism and populist focus.

Big picture risk to watch (unchanged): Complacency caused by overoptimism and overconfidence. Fundamentals are still weak and many countries struggle with large fiscal deficits leaving very limited fiscal space in case of a slowdown. Infrastructure (power, roads, harbours) reaching breaking points with slow, inadequate responses – often complicated by vested interests. Should be seen in light of increasing business need and increased public expectations. Gradual increasing domestic protests – ranging from peaceful, constructive protests (social media, peaceful, organised street protests) to large, spontaneous protests, driven by inequality and demand for better accountablity.

Reform drivers: There are still reformers in governments and a number of leaders have good intentions, but their power and space is limited. Over time, a stronger and more professional private sector may reach critical mass. Parts of urban middle classes can be a driver of reform, but will need to up their game if they want real influence. Civil society may be a driver, but the core narrative remains poorly coordinated and overly interventionist in most places. The international community can drive some reform on the margins (eg. on corruption, trade and security). In the places where fiscal space is increasingly limited crisis or risk of crisis may be a driver of reform.

This week we are focusing on a popular subject – the growing African middle class and the implications for business opportunities, future growth and development objectives.

The facts:

There is major variation in the estimates of the middle class, mostly caused by different definitions. Broadly speaking, the two most common definitions are:

USD 2 per day income or more. This definition is used by the African Development Bank. This would mean a middle class around 350-400 million across Sub-Saharan Africa. It would be set to reach 500 million by 2020.

USD 30 per day income or more. Used by analysts wanting to measure more traditional middle class behaviours, eg. McKinsey and Ernst and Young. Applying this definition, the present middle class is around 15 million people. Estimated to reach 25 million by 2020.

The African middle class is largely urban. In terms of size, the numbers (both definitions) are comparable to India’s. Lastly, it’s a relatively young middle class.

Business implications:

While growing faster than anywhere else, the middle class is still small in Africa. And using the USD 2 definition, the market is still very different than a more traditional middle class market and requires innovative approaches (smaller units, different distribution channels). Key features and opportunities:

Services: Private health, education, financial services continue to grow rapidly and have substantial continued potential, from the low-end middle class to the top segment.

For education and health and similar services: At the middle and top end, credible certification and quality assurance is crucial.

Luxury goods: critical mass reached in more and more places (more than 50 cities have above 1 million inhabitants)

Still lots of gaps: Quality vocational training, mechanics etc. And everybody seem to complain about regular stock-outs, spare-parts and abnormally high prices for the above.

Consumer goods: for the low end – rapidly growing potential for goods, food and beverages. Packages and sizes must correspond with price strategies and distribution.

Don’t forget women: Women as a group are the fastest growing market globally and within that group, African middle class women are the fastest growing segment. But it’s also a very diverse group, which requires targeted approaches.

International is good, but increasingly with a local or African touch.

Observations and qualifications:

Fragility: Especially the low-end consumers are at risk of falling back below the poverty line; an important fact given that the vast majority of the middle class is in the 2-5 USD group. They may have certain consumerist behaviours, but in quite different ways than more traditional and established middle class.

Growth estimates: There are major risks and assumptions around the growth estimates. Essentially, the growth in numbers rests on assumptions that economic growth rates will be maintained. It is ATM’s view that growth estimates are underestimating political risks and rests on assumptions that African governments will be able and willing to continue incremental reform. A key parameter to monitor is continued government reform and business environment improvements.

Key risks: After a decade of natural resource driven growth and with benefits from the structural adjustment reforms of the 1990ties still yielding benefits some degree of complacency is visible. Not all countries are pursuing progressive policies and there are increasing risks of interventionism and populist policies. See ATM post from July 2014 on Africa outlook for more detail.

Middle class political engagement: Broadly speaking, the middle class discusses and complains about politics and politicians, but they do not engage as a group – and certainly not beyond call-in radio shows. Few African countries have seen emergence of middle class parties and the few that have (Kenya, Nigeria), have not succeeded in attracting more than 1-2 per cent of the vote. The middle class is much less likely to vote.

What will make the middle class act: The tax link is generally weak, especially in oil/mineral rich countries and the middle class where the deal seems to be “we don’t pay tax, and in return, we don’t expect anything but stability from government”. The middle class is increasingly unlikely to be users of day-to-day public services such as health and education. What will or seem to be the “red line” is when government cannot provide acceptable levels of stability and infrastructure or when corruption gets too overt – especially in times of perceived or real crisis. The January 2012 fuel subsidy strikes in Nigeria is an example of that.

Contact us for more information or details on: contact@africatrendsmatter.com

This week is on Uganda – one of Africa’s fastest growing economies – and possibly the country with the highest growth rate in 2018 when oil comes on-stream.

As always, contact us on contact@africatrendsmatter.com if you have questions or are interested in the underlying scenarios.

Next week we will share our thoughts on the opportunities and issues related to the rapidly growing African middle class. Who are they, how big is the group, how diverse, what drives them and what matters to them. Exciting stuff, whether your focus in business, politics or development!

Underlying-trends:

Continued growth for the short- and medium term. Oil, expected in 2018 will maintain high growth, with world record levels of growth for the year oil comes on-stream.

Two major risks – transition and demography. Museveni is 70 and transition will be tough, no matter what form it takes. Uganda’s 3.5% population growth rate is among the highest in the world and puts high demands on job creation.

Issue

Parameters

Status, July 2014

Why

To watch

Present situation

Social development

Growth and macro-economy

Governance

Global drivers

Second best

Trend: ↘

Growth and stability continues, but long-term succession to Museveni will increasingly lead to uncertainty.

Growth ↗

Macro-economic stability ↔

Economic management ↔ Corruption ↘

Democracy ↘

Security ↘

Delays in oil starting-year (or major fall-out with IOCs)

Elections 2016

Museveni succession and possible split of NRM

Security; visible public dissatisfaction, urban or in oil areas internal

Analysis:

Uganda is on a short- and medium term positive growth trend, but yet on an increasingly downward overall trend with real risks around the politics. Overall sound economic management, combined with continued mileage in Uganda’s relatively market-friendly economy and above all with oil are the main drivers.

The risks are almost entirely political and are closely connected with succession. Key questions are whether Museveni will continue after 2016 (we think he will), how will other NRM ambitious leaders react, can Museveni maintain the patronage network and will a new, credible opposition leader emerge.

The other main risk is around population growth: 3.5% population growth is amongst the higest in the world. The demand for jobs combined with increased urbanisation is an opportunity in some respects, but on balance in the Ugandan context probably more of a risk.

For now, none of the risks are imminent; in the absence of a uniting opposition and with “good enough” growth rates, Ugandans are still accepting NRM and are not willing to seriously challenge status quo. However, this could change rapidly and could be triggered by a range of smaller events.

In terms of security, there are risks of terrorist attacks due to Uganda’s engagement in Somalia. There are also risks of tension related to South Sudanese refugees. Finally, there are risks in the oil areas, both in terms of local violence and with DRC.

Scenario status:

We operate 5 core scenarios. Overall, there are most features from the 2nd best scenario with a few features from the top scenario (continued natural resource finds, growth) and an increasing number from the 3rd scenario (leadership, succession, institutional level/reform, jobs, corruption). An important finding in our scenarios is that parts of scenario 2 and all of scenarios 3, 4 and 5 lead to a downward spiral in the medium- and long-term. Almost everything in the scenarios depend on 3 inter-related issues:

how- and when Museveni handles succession

how oil revenue is managed – with Uganda potentially producing 200,000 barrels of oil per day from 2020, proportions to the economy (and risks) would be similar to Nigeria.

This week is the final update on Ghana. The focus is on the economic and political trends so if you are mainly interested in the business implications please refer to the earlier Ghana update (2 weeks ago) or contact us on contact@africatrendsmatter.com. We plan to provide a further update on Ghana in late September once we have a clearer picture on the Eurobonds, the IMF discussions, the NPP party challenges and the implications for growth and business.

Next week we will have a closer look at Uganda.

Underlying-trends:

Continued growth for the short term, but real risk of crisis. Growth will continue based on increased oil production. Increasing risks of rapid slow-down. Jobless growth. Risk of increasing populism (increased interventionism, possibly using faultlines).

Slowly changing “political DNA”. Leading parties and party strategists still playing by the old rules, but the urban middle class is changing (more floating voters)

Inequality is increasing. Perceived and real gaps are becoming more visible gaps.

Issue

Parameters

Status, Aug 2014

Why

To watch

Present situation

Social development

Growth and macro-economy

Governance

Global drivers

Second best

Trend: ↘

Growth and stability continues, but crisis approaching. Will be in 3rd (of 4) scenario within 2-3 months.

Macro-economic stability ↘

Economic mgmt ↘

Corruption ↘

Democracy ↔ Inequality →

Increasing interventionism, populism

Imminent crisis signs (arrears, both forex and domestic) leading to shortages. Eurobond issue happening at at what rate? IMF deal

Ghana is on an increasingly downward trend with real risks of social, fiscal and macro crisis, building up during the next 3-6 months. Some degree of denial at the top still exists. Government disconnect and increasingly hollow rhetoric and partially open political discontent in NDC are some of the signs.

The coming 2-3 months will likely provide much more clarity on the depth of the slowdown as well as government’s willingness and ability to address the problems. The planned eurobonds issue (August) and the IMF mission (September) will be particular event to monitor.

Politically, the leadership is facing serious criticism, both for worsening living conditions, but also for poor communication and not being in control. Government credibility is increasingly a challenge with overly defensive lines on exchange rates, denial of the ongoing diesel crisis and some degree of suspicion on growth and inflation data.

The leadership seems to be aware of some of these issues, but is yet to come up with a clear, credible plan to drive even relatively simple (and potentially popular) messages and reforms such as addressing ghost workers or key corruption cases. There are indications of multiple power centres in NDC as well as regular media reporting on tensions within Flagstaff (presidency) and cabinet. No signs of Mahama not winning the NDC nomination, but NDC leaders will know that he may not easily win in 2016 – that’s unless the opposition NPP implodes.

Eurobonds: Government reportedly plans to issue eurobonds during August. With Zambia paying more than 8% for their latest bonds, Ghana would likely have to pay more given a deeper crisis and poorer ratings, although investors will be aware that oil production will likely double to 200.000 barrels during 2016 and thus close the current account deficit.

Scenario status:

We operate 4 core scenarios. Overall, there are most features from the 2nd best scenario with a few features from the top scenario (continued natural resource finds, G7 growth) and an increasing number from the 3rd scenario (leadership, institutional level/reform, fiscal space and China slowdown). We are also closely following key political events – notably party conventions in late 2014, budget and revenue data, gold, cocoa, oil and gas production, fiscal crisis signs and implications.

The indicators:

The World Bank CPIA, indicator of public sector quality: Overall a stable picture, marginal decline or possibly just becoming more realistic. Same for TI on corruption.

Mo Ibrahim indicators (rule of law, human development, business opportunities and human rights) are stable at a relatively high African level between 2006 – 2013, although with a small, but consistent decrease in economic opportunity from 2008.